What It Means (Simple Explanation)
Deferred revenue is money you’ve been paid—but haven’t earned yet. If a customer pays upfront for a year, you can’t call it revenue right away. It sits as a liability until you deliver the service.
Example
A customer pays $1,200 for a 12-month subscription. You recognize $100 each month. The rest? That’s deferred until it’s earned.
Why This Matters (To SaaS & Finance Teams)
You need to know how much of your cash is actually “earned” revenue. Getting this wrong skews your books, confuses investors, and distorts forecasts.
Ordway tracks deferred revenue automatically by linking payments to service periods inside its billing platform. It keeps your revenue recognition clean and auditable.
How It Works (Break It Down Simply)
- Customer pays in advance (e.g., annual plan)
- Payment gets logged as deferred revenue (liability)
- Each month, a portion moves from deferred to recognized revenue
- When the service is fully delivered, the balance is zero
Common Headaches
- Forgetting to defer revenue and over-reporting GAAP revenue
- Complex revenue schedules for multi-line contracts
- Spreadsheets that become unmanageable with customer growth
- Failed audits or investor concerns during fundraising
Best Practices
- Don’t recognize revenue upfront for annual contracts
- Use billing events to trigger deferred revenue entries
- Track deferred revenue by customer and plan
- Keep schedules visible to finance, not just buried in files
- Recalculate when contracts are upgraded or renewed
When to Track Deferred Revenue
Any time you bill in advance—monthly, quarterly, or annually. Especially important for proper GAAP financial reporting to support audits, outside investments, and planning.KPI Impact / What It Affects
Deferred revenue affects revenue forecasts, compliance, cash flow clarity, and trust in financial statements. It’s a sign of future revenue already secured.FAQ Section (Quick Answers to Real Questions)
What is the difference between deferred revenue and unearned revenue?
Deferred revenue and unearned revenue are essentially interchangeable terms that describe money received by a company for goods or services that have not yet been delivered or performed. Both represent a liability on the balance sheet, as the company has an obligation to provide future value to the customer. The key concept is that the revenue has been “deferred” or is “unearned” until the performance obligation is met.
Can you provide examples of deferred revenue journal entries?
Initial deferred revenue is recorded when cash is received for future services by debiting Cash and crediting a Deferred Revenue (liability) account. As the service is delivered or the obligation is satisfied over time, a subsequent entry is made to recognize the revenue. This involves debiting Deferred Revenue and crediting a recognized Revenue account (e.g., Service Revenue).
How does deferred revenue impact financial statements?
Deferred revenue is initially recorded as a liability on the balance sheet, signifying an obligation to deliver future goods or services. As the company fulfills its performance obligations, the deferred revenue liability decreases, and the corresponding amount is recognized as earned revenue on the income statement. This recognition increases net income and, consequently, retained earnings over time.
What are the best practices for managing deferred revenue?
Best practices include maintaining accurate and detailed records of all contracts and payment terms, utilizing robust accounting software or specialized revenue recognition solutions, and implementing clear internal processes for tracking delivery milestones. Regular reconciliation of deferred revenue accounts and strict adherence to relevant revenue recognition standards, such as ASC 606, are also crucial for compliance and financial accuracy.
How is deferred revenue treated under ASC 606?
Under ASC 606, deferred revenue arises when a company receives payment (or has the right to an amount of consideration that is unconditional) before transferring promised goods or services to a customer. It is classified as a “contract liability” on the balance sheet. Revenue is then recognized only when the company satisfies its performance obligations, adhering to the five-step model for revenue recognition.
How do you calculate a deferred revenue amortization schedule?
To calculate a deferred revenue amortization schedule, divide the total deferred revenue amount by the number of periods (e.g., months) over which the service will be delivered or the performance obligation will be satisfied. This calculation determines the specific portion of revenue to be recognized incrementally in each period. This systematic recognition continues until the entire deferred amount is fully earned and recorded as revenue.
What are common examples of deferred revenue in the SaaS industry?
In the SaaS industry, deferred revenue commonly arises from customers making upfront payments for annual or multi-year software subscriptions. Other key examples include advance payments for professional services like implementation, customization, or training that are yet to be delivered, as well as pre-paid annual support contracts where services will be provided over time.
Want to Go Deeper?
Let Ordway take the manual work out of deferred revenue tracking. Request a demo
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